10 Questions
What is the primary difference in transactions between domestic and foreign residents in an open economy?
The involvement of foreign currencies
Where does the foreign exchange market physically take place?
It is not a single physical place
What is the primary function of an exchange rate?
To translate between different currencies
How can the price of one country's currency be expressed?
Both (a) and (b) are correct
What is the primary topic discussed in the given text?
All of the above
What does a rise in the Ethiopian birr per US dollar exchange rate from 9.22 to 9.30 indicate?
The birr has depreciated in value relative to the US dollar
If the exchange rate is expressed as the price of the foreign currency in terms of the domestic currency, what does an increase from $0.11 per birr to $0.12 per birr signify?
The birr has appreciated in value relative to the US dollar
Which currency is described as a "vehicle currency" in the text?
The US dollar
According to the passage, which of the following is NOT mentioned as one of the most important foreign exchange centers?
Paris
What has further facilitated communication among foreign exchange participants and economic agents, according to the text?
The current development in Information Communication Technology
Study Notes
Foreign Exchange Rate & Market
- In an open economy, international trade involves different currencies, requiring importers to buy foreign currencies with their domestic currency in the foreign exchange market.
- The foreign exchange market is a worldwide market where national currencies are traded, comprising commercial banks, foreign exchange brokers, and authorized agents.
- The market is facilitated by advanced communication technologies, such as telephones, online computers, telex, fax, and video conferencing.
Exchange Rate
- The exchange rate is the price of one country's money in units of another country's money, acting as a translator between different currencies.
- Exchange rates can be expressed in two ways:
- Domestic currency units per unit of foreign exchange (e.g., 9.22 birr per 1 USD)
- Foreign currency units per unit of domestic currency (e.g., 0.11 USD per 1 birr)
Characteristics of the Foreign Exchange Market
- The foreign exchange market is a global market comprising commercial banks, foreign exchange brokers, and authorized agents trading in most world currencies.
- Major foreign exchange centers include London, New York, Tokyo, Singapore, and Frankfurt.
- The US dollar is the most widely traded currency, known as a vehicle currency due to its widespread use in international transactions, including oil and primary commodity pricing.
Test your knowledge on the foreign exchange rate and market in an open economy. Learn about the differences in transaction of goods and services between domestic and foreign residents, as well as the involvement of foreign currencies in international trade.
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